It’s been a little while since I delivered an update on our portfolio and our posture within the overall market. This is a big one because in the last month or so I needed to work behind the scenes to attack an existential challenge to the way we used to operate here . . . and you’ve already started to see the results.

Start with the big view. The power of investing in value stocks revolves around the notion that Wall Street will always rotate money out of names that have gotten expensive according to some metric and roll back into other names that are trading at a relative discount, sooner or later.

That’s why we’ve loaded up on stocks that for whatever reason had been pushed down to that discount level. They were “temporarily embarrassed” due to a superficially weak earnings report, contagious selling in their sector or simple bad luck.

Sooner or later, the market always sees reason and that temporary embarrassment evaporates. A stock that no longer commanded the valuation of its peers recovers. The numbers line up again. The discount gets absorbed.

However, the key phrase there is “sooner or later.” It can take a long time for the market to see reason, and to paraphrase the great line from John Maynard Keynes, the market can remain irrational for longer than we can remain patient.

In other words, “later” can come too late. Patience stretches to the snapping point. We look around and see other investors doing well with stocks that we would never touch (they aren’t “embarrassed” enough) and resentment builds.

That’s normally okay because in the world of value investing there’s also a mechanism for our stocks to compensate us while we’re waiting for the share price to recover. Dividends are literally the way a management team rewards shareholders for hanging onto a stock that isn’t going anywhere special.

We book a lot of dividends around here. This is why value investing is such a favorite among risk-averse investors or those who need a source of steady income to pay the bills. Even if the stocks go nowhere, the cash keeps flowing. We can afford to be patient.

For these investors, the calculus is simple. We’re taking on a little bit of risk that the stock will go down or that dividends will be interrupted, which means the cash yield needs to be higher than what we’d lock in on risk-free Treasury debt, CDs or other vehicles.

When rates were zero, that was no problem. Pretty much any dividend-paying stock would generate higher income than bonds . . . even Apple (AAPL), which isn’t really known as a dividend champion, paid shareholders more cash than five-year Treasury debt as recently as 2021.

But that feels like a different world now. Cash instruments pay 5% and long-term Treasury bonds trigger market anxieties here around 4.5%. In this environment, nobody buys a stock like AAPL for the dividend.

And that raised serious questions about many of the yields we had locked in on the Buy List. Great companies. Embarrassed stocks. If the dividend was competitive, we could give the market years to see reason . . . we would have had a reason to be patient.

But that just wasn’t true of all of our stocks. PAHC, for example, is a great company. Back in the zero-rate world, it felt pretty good every time we cashed a $0.12 check for every share we owned because we were doing better than people who parked their money in the bond market.

“Sooner or later” stretched into years. Wall Street has yet to see the power of this company. Even when we finally sold, PAHC was still trading at a discount compared to the S&P 500 . . . but nobody was jumping to buy the stock and resolve that valuation gap.

And in that light, the dividend just wasn’t enough to justify our patience. Consider this: we gave PAHC a place on the Buy List for two full years. The stock went nowhere good. If it goes nowhere especially interesting from here, it will take the dividends FIVE years to close the gap on our loss and make us whole . . . SIX years before we make money.

That’s too long. The “later” is too late.

SYY was a similar story. Great company. But a 2.7% yield is just not enough to keep us from looking enviously at money markets . . . and that’s outrageous. We gave it over a year. “Later” is too late.

In the place of SYY and PAHC, we now have TNL, TCPC and ICMB. They pay a lot more than 2.7% a year, so even if for some reason Wall Street stays “irrational” on these names for a long time, we’ll keep cashing checks that those money markets just can’t match.

Before this rotation started, our overall yield on the portfolio clocked in at 3.12% a year . . . respectable by S&P 500 standards but the S&P 500 has the advantage of being beloved by investors around the world. Our stocks, neglected as they were when we bought in (and still neglected today), needed to bring a lot more to the table.

Now I can say with a measure of pride that our annual cash payout has climbed to 6.83% on average. Money markets can’t match that. You won’t find that in the Treasury market or CDs.

If for some reason our stocks go nowhere good in the next year, we’ll still end up with 6.8% in cash to justify our time. And I suspect that our current stocks have the power to do a lot better than “nowhere good.” Our old names were dead money. These are fresh.

TCPC and ICMB in particular have the power of known asset values on their side. Management lays it out with every quarterly report. Right now, TCPC’s loans are worth $11.14 per share. The underlying interest payments, meanwhile, generate enough cash to pay the dividend.

That $11.14 has gone down but it’s still a few percentage points better than the price we bought in at. When the discount resolves (“sooner or later”), we’ll be able to add those points to our overall score. In theory, the asset value here could go up again when the Fed relaxes a little.

But in the meantime, we earn money at a rate of 12.6% as long as we hold the stock and management finds the cash to pay us. They’ve been able to do that for the last 12 years. Think of the last 12 years. A wild ride, right? And yet the cash kept flowing to TCPC shareholders.

ICMB is a similar story. Management says the book of business is worth $5.49 per share. That valuation has come down and may keep coming down . . . but right now, there’s a clear 60% discount here. Someone ambitious could simply buy the company out here, liquidate and walk away with a $30 million profit.

Nobody is doing it because they can’t find a way to run these loans better than the existing management team, who apparently isn’t willing to sell either. Meanwhile, shareholders keep getting as much cash from every ICMB share as we did on PAHC.

Express that math differently: take $17 and buy one share of PAHC or five shares of ICMB. The five ICMB shares will pay you $0.60 per quarter. The PAHC share will pay you $0.12. If you want income, where do you go?

That’s why we went here. TNL pays as much per share as SYY did . . . but these shares are a lot cheaper, which means the effective yield is a lot higher. And under the right conditions, I think we’ll see TNL trade above $60 like it did in the pandemic.

Consider that, by the way. In the lockdown era, TNL wasn’t exactly doing gangbuster business with its resorts. The quarterly dividend needed to drop to $0.30 per share . . . but this was still a $60 stock at the time.

That’s what happens when Wall Street’s “irrationality” swings in the other direction. We’re open to that here.

It’s a good thing. Now our sprint for yield is not quite over yet. HON barely pays 2% a year. We’ll probably take our small win off the table soon and rotate into something fresher.

Likewise, SON and WEC are old news. The market has persistently refused to see the value here. We can’t change that . . . but at least the dividends have given us a slightly better reason to hang around.

A week ago, SON and WEC were dividend leaders here. Suddenly they’re laggards. If they can’t perform soon, we’ll find something better to replace them.

And then there’s KMT. We’ve only been here a few months, but back in February it was a dividend leader for us. We were trading up to lock in the yield.

Now it’s looking tired. “Sooner or later,” it’s going to go. In this case, I think we’ll lean a little on the “sooner” part.

Either way, the heavy lifting behind the scenes is done. We’re already reaping the rewards. I’ll be talking to you a lot more often from here.